AUSTIN, Texas–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘AAA’ rating to the following bonds issued
by the Indiana Finance Authority (IFA):
–Approximately $125.0 million state revolving fund (SRF) program bonds,
series 2016A (Green Bonds);
–Approximately $72.8 million SRF program refunding bonds, series 2016B
Series 2016A bond proceeds will be used to finance certain water and
wastewater system projects in the state and to pay costs of issuance.
The series 2016B bond proceeds will be used to refund certain
outstanding series of bonds and to pay costs of issuance. The bonds are
expected to price via negotiated sale the week of March 7.
In addition, Fitch has affirmed the ‘AAA’ rating on the following:
–Approximately $1.3 billion outstanding SRF parity bonds.
The Rating Outlook is Stable.
The bonds are secured by loan repayments, debt service reserve funds
and/or releases from such funds, and other accounts pledged under the
series and master trust indentures.
KEY RATING DRIVERS
SOUND FINANCIAL STRUCTURE: Fitch’s cash flow modeling demonstrates that
IFA’s combined clean water (CW) SRF and drinking water (DW) SRF program
(the program) can continue to pay bond debt service even with loan
defaults in excess of Fitch’s ‘AAA’ liability rating stress hurdle, as
produced using Fitch’s Portfolio Stress Calculator (PSC).
MODERATE POOL DIVERSITY: IFA’s combined loan pool is large and
moderately diverse. The largest borrower, the city of Fort Wayne,
represents a manageable 9.5% of the combined pool. The largest 10
borrowers represent approximately 44% of the total pool.
BELOW-AVERAGE POOL QUALITY: Approximately 60% of IFA’s loan portfolio
consists of unrated entities, which Fitch conservatively assumes to be
of speculative-grade credit quality in its analysis. Overall, pool
credit quality is slightly below average in comparison to other SRFs
rated by Fitch.
STRONG PROGRAM MANAGEMENT: The IFA adheres to consistent, conservative
underwriting policies. Management and underwriting strength is exhibited
by the fact that the program has never experienced a pledged loan
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in
aggregate borrower credit quality, increased pool concentration or
increased leveraging resulting in the Indiana Finance Authority’s loan
program’s inability to pass Fitch’s ‘AAA’ liability rating stress hurdle
would put downward pressure on the rating. The Stable Rating Outlook
reflects Fitch’s view that these events are unlikely to occur.
IFA’s SRF programs were created to provide loans to local entities for
wastewater and drinking system improvements. The IFA is responsible for
administration and management of the SRFs. Bond proceeds and recycled
funds are combined with federal grants and a state matching requirement
to provide loans for such projects.
Most of the program’s credit metrics, including those of the financial
structure and pool credit quality, have remained stable over the past
several years. Like many SRF programs, the IFA is in the process of
transitioning the program from primarily a reserve fund structure,
wherein loss protection is provided by reserves, to a cash flow
structure, or one in which loss protection is provided by available
surplus cash flows.
FINANCIAL STRUCTURE EXHIBITS ADEQUATE DEFAULT TOLERANCE
Fitch measures financial strength of SRFs by calculating each program’s
asset strength ratio (PASR). The PASR includes the sum of the total
scheduled pledged loan repayments and reserves divided by total
scheduled bond debt service. IFA’s PASR is 1.4x, which is slightly worse
with than Fitch’s 2015 ‘AAA’ rating category median of 1.9x but is still
considered to be supportive of Fitch’s ‘AAA’ rating.
Due to the strength of the financial structure, cash-flow modeling
demonstrates that the program can continue to pay bond debt service even
with hypothetical loan defaults of 80.3% in the first, and 100% in the
middle and last four years of the program’s life (as per Fitch criteria,
a 90% recovery is also applied in its cash flow model when determining
default tolerance). This is in excess of the IFA’s ‘AAA’ liability
rating stress hurdle of 44%, as produced by Fitch’s PSC. The rating
stress hurdle is calculated based on overall program credit quality as
measured by the ratings of underlying borrowers, borrower size, loan
term and concentration.
LOSS PROTECTION PROVIDED BY RESERVES AND OVERCOLLATERALIZATION
Under the SRF program’s structure, each bond series is protected from
losses by borrower loans made in excess of bond debt service
(overcollateralization) and, in certain prior series, separately secured
debt service reserves. As series bonds amortize, released reserves,
excess loan repayments and interest earnings are deposited into a
deficiency fund, which is available to make debt service payments on any
bonds issued under the master trust indenture. The method by which
excess amounts are deposited into the deficiency fund allows for
cross-collateralization between the CWSRF and DWSRF, increasing pool
diversity and potentially lowering total loss amounts. Due to the
cross-collateralization feature, Fitch combines the programs in its cash
No dedicated reserve fund is expected to be funded with the series 2016
bonds. However, the bonds benefit from excess reserve deallocations
released from previous series’ reserves, as described in the preceding
paragraph. At the direction of the IFA, funding of dedicated reserves
for the series bonds may be initiated by delivering written notice to
the trustee. Combined reserve balances from previous bond issues are
approximately $180 million, or roughly 13% of total outstanding bonds.
Minimum annual debt service coverage is calculated to be about 1.05x,
which is low but typical for SRF structures enhanced by reserve funds.
As the transition from a reserve fund to a cash flow structure
continues, minimum annual debt service coverage is expected to improve.
Current projections demonstrate coverage improving to 1.2x by 2020 and
then remaining at or better than this level through maturity.
LOAN POOL MODERATELY DIVERSIFIED
The combined loan pool is composed of about 350 borrowers. Excluding the
Indianapolis Local Public Improvement Bond Bank, whose loans were
defeased via an escrow agreement in 2011, the city of Fort Wayne is the
largest participant, representing about 9.5% of the pool. At 8.3% and
7.4% respectively, the second and third largest borrowers are the Terre
Haute Sanitation District (THSD) and the city of Evansville. Although
the specific loan securities pledged by these borrowers are not rated by
Fitch, all three are assessed to be of strong credit quality. However,
management reports that the THSD has had recent trouble managing its
expenses under its property tax cap. As a result, the IFA has prudently
required additional provisions to ensure THSD’s loans are paid in full
and on time. Most notably, the utility is raising rates by 15% this year
and has deposited $3 million with IFA’s trustee until the rate increase
takes effect. Fitch will continue to monitor this situation.
Each remaining program participant accounts for 4% or less of the total
pool. In aggregate, the top-10 borrowers represent approximately 44% of
the loan pool versus Fitch’s ‘AAA’ median level of 55%. Based on these
attributes, Fitch views the loan pool as having somewhat better
diversity than similar ‘AAA’ programs.
While approximately 40% of the pool is rated ‘BBB+’ or better, the
remaining 60% does not have a public rating. Therefore, in accordance
with its criteria, the unrated portion of the pool was conservatively
estimated to be of speculative grade credit quality (‘BB’) in Fitch’s
Due largely to the number of unrated entities, credit quality is
somewhat weaker than that of similar municipal pools rated by Fitch, as
reflected by an ‘AAA’ PSC liability stress hurdle of 44% versus Fitch’s
‘AAA’ median level of 31% (lower liability stresses correlate to
stronger credit quality). However, the strong loan security pledges,
which consist primarily of water/wastewater net system revenues, and
above-average pool diversity somewhat mitigate the pool credit risk.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
IFA manages both the CWSRF and DWSRF programs using strong underwriting
practices. Among other factors, IFA takes into consideration in its
borrower assessment the creditworthiness of the borrower and
environmental goals of the SRF program. Loans secured by system revenue
pledges (the primary source of loan security) must demonstrate minimum
coverage of 1.25x annual debt service coverage and are also required to
create a local debt service reserve fund equal to 1.0x maximum annual
Loans are typically limited to 20 years and are structured with level
annual payments. Annual loan monitoring is conducted on outstanding
borrowers and includes verification of local reserves and a review of
financial statements. No loan defaults have been reported within the IFA
SRFs to date.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s
Revenue-Supported Rating Criteria, this action was additionally informed
by information from Creditscope.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 29
Dodd-Frank Rating Information Disclosure Form
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Julie G. Seebach
Elizabeth Fogerty, +1-212-908-0526